BRUSSELS Feb 28 (Reuters) - Euro zone finance ministers expect talks on a bailout for Cyprus to gain new momentum on Monday, with a view to a deal with the island's new government at the end of March, a senior euro zone official said.
New President Nicos Anastasiades promised on Thursday to work for a swift deal for to prop up the Mediterranean island's banks, which need capital equal to Cyprus's annual economic output.
The Eurogroup of euro zone finance ministers meet on Monday to discuss the bailout, estimated at up to 17 billion euros ($22 billion), which had been blocked by the previous administration's refusal to sell state assets to cut debt.
"Monday will be about setting out the large items and seeing what the position of the new government is with regards to items from anti money laundering to privatisation," said the official.
"We will then have a clear picture of the timelines for programme negotiations and conclusions," said the official, who has close knowledge of the preparations for the meeting.
The talks on Monday could clear the way for lenders from the International Monetary Fund, the European Central Bank and the European Commission - dubbed the troika - to go to Cyprus and start negotiating details next week, he said.
"I strongly believe that we will be in a position to reach a conclusion by the second half of March," he said, adding many of the elements for the deal, especially fiscal policy, have already been implemented.
The difficulty with Cyprus is finding a way to make a bailout sustainable so that any money given is repaid, especially given that public opinion in countries such as Germany, Finland and the Netherlands is growing increasingly opposed to such aid.
German Finance Minister Wolfgang Schaeuble said on Wednesday that before the euro zone's bailout fund, the European Stability Mechanism (ESM), can help Cyprus, the troika had to establish if Cyprus was systemically important for euro zone stability.
Politicians from Germany have repeatedly expressed misgivings in recent months about financial transparency on the island, and whether its low-tax status in the EU could possibly aid money laundering for rich Russians. Cyprus says it has a clean bill of health.
Other euro zone officials said there was no question whether Cyprus was systemically relevant to the currency bloc.
"The European Union and the euro are systems and all parts are linked to the other, that is quite clear," European Commission President Jose Manuel Barroso said in Dublin.
"Cyprus is certainly a small country but it is part of the euro area and should be treated as part of the euro area," he said.
The island needs 8-10 billion to recapitalise its banks and 7 billion to repay loans and finance government operations.
Such a rescue would increase Cyprus's debts to around 145 percent of GDP, a level considered unsustainable. Greece's bailout calls for it to cut its debt-to-GDP ratio to 120 percent by 2020, but that would also be unsustainable for Cyprus.
One of the options under discussion is for those holding deposits in excess of 100,000 euros in Cypriot banks to take a loss if their bank is wound down, in order to scale down the oversized Cypriot financial sector.
President Nicos Anastasiades ruled out any haircut on depositors on Thursday, as well as any sovereign debt restructuring.
"I want to be absolutely clear. Absolutely no reference to a haircut on public debt or deposits will be tolerated. Such an issue isn't even up for discussion," Anastasiades said.
But European Central Bank's executive board member Benoit Coeure, in an interview with Reuters on Wednesday, made a more qualified statement saying there were no plans for a general 'bail-in' where depositors would give up some of their funds.
Pressed to say if that left open the possibility of a narrower surrender of deposits above the EU-guaranteed threshold of 100,000 euros, he said: "There needs to be an appropriate burden-sharing in the programme because we need to achieve debt sustainability. But no bail-in across the board.
"I don't pre-judge any instruments because the vocabulary matters and there are many ways to achieve burden-sharing."
ECB data showed that in January private-sector deposits in Cypriot banks fell just over 2 percent and stood at 47.4 billion euros at the end of the month.
"There has been a constant monitoring of capital and deposit movements and I see no reason for any short or medium term concerns there," the senior euro zone official said.